Strategy #2 - "Buy-Hold"...

By far, Strategy #2, Buy and Hold" is what most people think of when they think about getting wealthy in real estate.
And quite honestly, they should as it is a "Sure-fire" proven winning strategy. The question, of course, is why?

The answer is somewhat complex, not complicated, but complex. However, it can be reduced to one sentence:
The rules (at least in the United States) are stacked in your favor. Seriously, the tax laws favor "buying and holding onto" real estate, the Constitution provides for the protection of the asset that are unmatched when compared to other assets such as gold or stocks, and most importantly, you can get 90% (or better) financing for real estate, which is not possible for any other asset such as mutual funds or a privately-held equity interest in an operating companies (such as your own).

Think about it. If you wanted to start a company today and needed start up capital and went to your banker, the first thing the banker wants to know is not can they see a copy of your business plan, no the first question they ask is "do you own any real estate", and if the answer to that is "yes', then they will be happy to look at your business plan and make a loan to your business (well below a 90% loan to value) as long as you are willing to let your real estate serve as additional collateral. Go see the same bank and ask for a real estate loan and they will make you a 90% loan and definitely not ask you to let your company stock serve as additional collateral for the real estate loan. In short, they'll love your real estate and avoid your company like the plague in underwriting their loans.

So, what is buy/hold? It is as the name sounds, you buy a piece of real estate and you hold onto it, allowing your tenants to pay off your mortgage, while the real estate increases in value. Sounds simple - it can be, if you know what you are doing (starting to sound like a familiar theme?).

Big mistake many investors make fall into two categories:
a) not "buying right" upfront;
b) not recognizing the opportunities in front of them.

a) Not buying right - as with all real estate decision making, you make your money when you buy the asset and recognize it when you sell it. Now in a buy/hold strategy, we have to modify this a little to say: "You make your money when you buy and you recognize your profit, when the mortgage is paid". Explanation: To make money in real estate you HAVE TO BUY RIGHT. Some times this means paying less than what is being asked, and sometimes it means being creative with the terms. And sometimes it simply means having the right financing for the particular deal. But bottom line, is that you have to avoid "over paying" up front if you are going to be financially rewarded on the back-end. Unlike other strategies that involve "quick cash" or a quick turn-around, when you buy/hold, you are recognizing your profits each month, without selling. How?

One way is through the pay down of the mortgage. Each month in an amortized mortgage (any mortgage that is not "interest only" will have some degree of amortization) you pay one payment that is credited to BOTH the interest and the principal. Therefore, with a 30-year mortgage, you will be paying down a little of the amount borrowed with each payment as well as the interest due. As Ben Franklin said, "A penny saved is a penny earned" - same is true of nickels and dollars! So with each mortgage payment sent in, you actually are "earning" a small profit with the pay down of the principal. So, in theory, even if the building does not go up in value, you are still earning a profit. Albeit, a very small one. Now, if the building is actually going up in value over time, then you are earning the profit from the pay down of the mortgage, plus the profit recognized from appreciation. But that is not even the "juicy" part.

The real "pay day" from a buy/hold strategy (assuming there is an increase in value occurring) is that periodically, you can refinance the property and any additional amounts you pull out from the refinance are TAX-FREE! Don't even ask me why - they just are. So. if you stop and think about it, anyone who has even a little business savvy should be looking for ways to profit from "Buy/Hold", because with buy/hold you can have your cake and eat it to. That is, you can own the asset, make a regular income from the asset and every once in a while refinance (rather than selling) and have a big hit of cash come into your bank account (as if you had sold it), tax free, and when you wake up tomorrow, the asset is still there - Cool!

Tomorrow, let's talk about you make "buy/hold" work for you, even if you have lousy credit, your spouse just left you and the dog bit you in the butt on his way out the door...